Edited version of your written advice

Authorisation Number: 1013125105121

Date of advice: 14 December 2016

Ruling

Subject: Capital gains tax implications for redemption of units

Question 1

Will CGT event C2 happen pursuant to subsection 104-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the trustee of the Trust (Trustee) exercises its discretion to redeem all of the original units and, in exchange, issues the unitholders new units?

Answer

Yes

Question 2

Will the unitholders be eligible to choose roll-over relief in relation to the exchange of each of their original units for new units pursuant to Subdivision 124-E of the ITAA 1997?

Answer

Yes

Question 3

Will the unitholders be taken to have acquired their shares in the Company for CGT discount purposes at the date they originally acquired their original units in the Trust pursuant to section 115-30 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

1 July 20XX to 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

1. The unitholders are Australian residents who own original units in the Trust.

2. The trustee of the Trust proposes to exercise its discretion to redeem all original units in exchange for new units in the Trust (and nothing else).

3. The unitholder will then exchange each of their new units in the Trust for one ordinary share in the Company (and nothing else).

Assumptions

When the unitholders dispose of their new units in exchange for shares in the Company:

(a) CGT event A1 will occur; and

(b) The unitholders will be eligible for roll-over relief pursuant to Division 615 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 Subdivision 124-E

Income Tax Assessment Act 1997 Division 615

Reasons for decision

Question 1

CGT event C2, under section 104-25 of the ITAA 1997, happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited.

The original units in the Trust are intangible CGT assets.

The Trustee will exercise its discretion under the Trust Deed to redeem all the original units in exchange for new units issued under the Trust Deed (and nothing else).

On the Trustee exercising its discretion to redeem all of the original units, the unitholders' ownership of the original units will end. Accordingly, CGT event C2 will happen to those unitholders in respect of their original units pursuant to subsection 104-25(1) of the ITAA 1997.

Question 2

Subject to certain requirements being met, Subdivision 124-E of the ITAA 1997 allows a taxpayer to choose to defer any capital gain or capital loss that may arise where there has been an exchange of shares in the same company (section 124-240 of the ITAA 1997) or an exchange of units in the same unit trust (section 124-245 of the ITAA 1997).

Based on the information provided, the requirements in Subdivision 124-E of the ITAA 1997 will be met and therefore the unitholders will be eligible to choose roll-over relief to defer any capital gain or capital loss made on the redemption of their original units in the Trust.

Question 3

Division 115 of the ITAA 1997 allows a taxpayer a discount on capital gains if certain conditions are met.

One of the applicable conditions is contained in subsection 115-25(1) of the ITAA 1997 which provides that a capital gain can only be a discount capital gain where the CGT asset which gave rise to the capital gain was acquired at least twelve months before the relevant CGT event.

With this in mind, subsection 115-30(1) of the ITAA 1997 allows owners of certain CGT assets to adopt an earlier acquisition time for the purpose of determining whether the twelve month ownership test in section 115-25 of the ITAA 1997 has been satisfied.

Relevant to the current circumstances, item 2 of the table in subsection 115-30(1) of the ITAA 1997 specifically provides that 'a CGT asset that the acquirer acquired as a replacement asset for a replacement-asset roll-over (other than a roll-over covered by paragraph 115-34(1)(c))' of the ITAA 1997 will be treated as if the acquirer had acquired the CGT asset:

(a) when the acquirer acquired the original asset involved in the roll-over; or

(b) if the acquirer acquired the replacement asset for a roll-over that was the last in an unbroken series of replacement-asset roll-overs (other than roll-overs covered by paragraph 115-34(1)(c) of the ITAA 1997)- when the acquirer acquired the original asset involved in the first roll-over in the series.

A 'replacement-asset roll-over' is defined in section 112-115 of the ITAA 1997, and relevantly includes the roll-overs under Subdivision 124-E of the ITAA 1997 and Division 615 of the ITAA 1997.

As detailed above, the unitholders will be eligible to choose roll-over relief, under Subdivision 124-E of the ITAA 1997, in relation to the exchange of each of their original units for new units. These new units will then be exchanged for shares in the Company with the unitholders eligible for roll-over relief under Division 615 of the ITAA 1997 in respect of this transaction.

Therefore, in accordance with paragraph (b) of item 2 in subsection 115-30(1) of the ITAA 1997, these shareholders (the former unitholders) will be treated as having acquired their shares in the Company at the time that they originally acquired their original units (the original assets) involved in the Subdivision 124-E roll-over (the first roll-over in the series).

For completeness, it is noted that neither the Subdivision 124-E roll-over nor the Division 615 roll-over are covered by paragraph 115-34(1)(c) of the ITAA 1997, and are therefore not excluded from the operation of item 2 in subsection 115-30(1) of the ITAA 1997.